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The Indian stock market experienced a significant downturn in October 2024, driven by a record outflow of funds by foreign portfolio investors (FPIs). Concerns over slowing earnings growth, elevated valuations, rising geopolitical tensions, and recent developments in China prompted FPIs to pull out a massive ₹1.14 lakh crore from Indian equities, resulting in the worst monthly performance for Indian benchmark indices in over four years. The Nifty 50 and S&P BSE Sensex witnessed sharp declines of 6.22% and 5.83% respectively, marking their worst monthly performance since March 2020.
The magnitude of the FPI exodus is unprecedented, surpassing the previous record set during the COVID-19 pandemic in March 2020, when FPIs sold ₹65,816 crore worth of Indian stocks. This outflow follows a substantial nine-month high investment of ₹57,724 crore in September 2024, driven by the Federal Reserve's decision to cut interest rates by 50 basis points. The continued selling by FPIs throughout October, with the largest outflow recorded on October 3 at ₹15,506 crore, highlights their concerns about the Indian market's prospects.
Despite the outflows from the secondary market, FPIs are actively participating in primary markets. Reports suggest that they invested nearly ₹20,000 crore in October, indicating a strategic shift towards potentially undervalued opportunities. Analysts believe that FPIs are selling stocks in the secondary market, where valuations are perceived to be high, while simultaneously buying in the primary market, where valuations are comparatively lower. The record FPI outflows have also had a negative impact on the Indian rupee, which has fallen to its lowest level of ₹84.20 against the US dollar.
The Indian market would have faced a more severe downturn if domestic institutional investors (DIIs) hadn't stepped in to buy stocks. DIIs played a crucial role in mitigating the sharp correction by purchasing ₹1.07 lakh crore worth of Indian stocks in October, almost equal to the size of foreign outflows. This support from DIIs, particularly mutual fund houses with a significant war chest of ₹2 lakh crore, provides a degree of resilience to the market in the face of continued FPI selling.
While the immediate outlook for the Indian market is uncertain, the robust performance of the market in the past year, with the Nifty returning 25% and the Nifty 500 returning 30% in Samvat 2080, has instilled a sense of optimism among investors. However, the recent correction has triggered concerns about the market's performance going forward. The sustained FPI selling, driven by India's elevated valuations and concerns over deceleration in earnings growth, poses a potential challenge for benchmark indices. In this context, investors are advised to focus on stock-specific investments, particularly in companies that have reported strong Q2 results and demonstrate bright earnings visibility.
Experts suggest that banking stocks, with deposit growth catching up with credit growth, are fairly valued and present a promising investment opportunity. The anticipated pick-up in public capex in H2FY25 bodes well for cement stocks. Pharma stocks like Sun Pharma and Cipla are also highlighted for their strong earnings visibility. As FPIs continue to navigate the evolving global landscape, their investment decisions will have a significant impact on the Indian stock market. Investors need to closely monitor market dynamics, including earnings reports, valuation trends, and global economic conditions, to make informed investment choices.
Source: Record Exodus: Foreign investors pull out ₹1.14 lakh crore from Indian stocks in October